These 4 Measures Indicate That Latitude Tree Holdings Berhad (KLSE:LATITUD) Is Using Debt Reasonably Well

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Latitude Tree Holdings Berhad (KLSE:LATITUD) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Latitude Tree Holdings Berhad

What Is Latitude Tree Holdings Berhad's Debt?

As you can see below, Latitude Tree Holdings Berhad had RM122.9m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have RM222.6m in cash offsetting this, leading to net cash of RM99.8m.

How Healthy Is Latitude Tree Holdings Berhad's Balance Sheet?

We can see from the most recent balance sheet that Latitude Tree Holdings Berhad had liabilities of RM240.8m falling due within a year, and liabilities of RM34.7m due beyond that. On the other hand, it had cash of RM222.6m and RM78.6m worth of receivables due within a year. So it can boast RM25.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Latitude Tree Holdings Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Latitude Tree Holdings Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that Latitude Tree Holdings Berhad has been able to increase its EBIT by 21% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Latitude Tree Holdings Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Latitude Tree Holdings Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Latitude Tree Holdings Berhad recorded free cash flow of 26% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Latitude Tree Holdings Berhad has net cash of RM99.8m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 21% over the last year. So we don't think Latitude Tree Holdings Berhad's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Latitude Tree Holdings Berhad (1 can't be ignored) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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